Things Your Financial Advisor Should Not Tell You
"Don't worry about the cost of the consultation. You pay nothing"
Getting something for free is great. Unfortunately, there is nothing free in this world, except the cheese in the mousetrap. Anyone who decides to get their finances in order and start investing runs into a lot of people who call themselves "financial advisors" and it's really hard to know who to trust.
On the one hand are the independent personal financial advisors, we pay directly to protect our interests, and on the other are the employees and intermediaries of investment, insurance, and other financial companies who receive commissions for the products they sell and have a strong incentive to offer them to us.
There's nothing wrong with having both types of advisers, but it's important for me to understand if I'm not paying anything for an expert's services, who is paying them and whose interests are they protecting.
A piece of Jewish wisdom states that if something is offered to you for free, then the merchandise is you. If you hear from your personal financial advisor that you don't owe anything for his services and someone else is paying for them, run away. He's already taken a side, but it's not yours.
"I will offer you a universal investment portfolio. It works for everyone"
You complete a short survey with several hypothetical situations for your future investments and this is enough for the financial advisor to prepare a "best" investment portfolio for you. It can be conservative, balanced or aggressive, depending on your answers to the questionnaire.
You finally tell yourself that you've found the right person and he has another surprise for you - he also tells you the exact ratio of stocks, bonds, property, gold and crypto that you should have. You don't know exactly what US Treasury Bonds are, but the financial advisor convinces you that you should have them. Stocks have picked them out for you too - you'll have some on Tesla, Meta ("they're bad now, but Mark knows what he's doing") and Palantir ("I don't know exactly what he does, but the IT guys say he's very good"). You must have gold and crypto (they are save heaven assets). There's also a fund in property - "their prices are always up".
A good personal financial advisor does NOT give you a solution and make your investment portfolio for you. The reason is that the same assets can't work for you, your neighbor, your parents, or a teacher in a small country town.
"Only I can offer you this investment and these conditions"
Whatever the reason is, in 99.99% of cases there is NO single person who can offer us certain terms on a certain product. It is even more doubtful when the financial advisor offers us an investment that only his company offers and we can't buy any other way. To me, this means that there is no free market at all and we are probably talking about a classic financial pyramid.
"You must act now!"
One of the strongest red flags for financial fraud is one that offers it to convince us that we will miss out on a "unique opportunity" if we don't invest now. It's even scarier when those words come from our personal financial advisor, whom we should have tremendous confidence in.
Unfortunately, it is not rare that these consultants work only in their own self-interest and the reason for all this rush is that they will get some bonus, higher commission or reward if they sell the product to as many people as possible in a certain period. Very often they call it a "campaign".
For example, if someone sells 10 or more 30-year life insurance policies with an investment fund by the end of the month, they will get a trip abroad with the other advisors who did the same. There's nothing wrong with rewarding good performance, but that adviser will do their best to convince their potential clients that this insurance is the best thing in the world and that they should take it out by the end of the month. If this turns out to be an unsuitable product for them, they will be warmed by the thought that he is one of the few to have achieved this goal and had a great time in Rome.
"It's an entirely passive investment. You don't have to do anything"
Sounds good - you make an investment once and forget it. In reality, it's not like that. I'm a fan of relatively passive investments and strategies, but even those need to be given some time each month to monitor and make adjustments if necessary.
Contrary to most advisors who sell active mutual funds, this is not an investment that needs any monitoring. With these funds, we are investing in a specific portfolio manager (or team) as well as a specific strategy. They may have worked for a long time, but at some point the fund starts to perform poorly and its returns lag its benchmark. Then it's a good time to replace the mutual fund with another. It is the same with trusts.
In ETFs, we have passive investments in their pure form, but it is also good to watch them, because in recent years there have been many "black swans" that change the present and the future. For example, in crises and times of uncertainty we may change our strategy from more passive to more active, as well as replace one ETF with another, sell our investments and stay in cash or something else.
With p2p platforms, stocks, crypto, gold, property and other investments, we should also not think that we do not need to look at them and make any changes. If we hear from a financial advisor that they are going to offer us a completely passive investment, we should keep one thing in mind.
"This product has a guaranteed high yield"
Recently the same happened to me:
I walked into the office of a finance company. I asked about investments and the advisor immediately offered life insurance with an investment fund. If you are wondering why, I will tell you - they have the highest commissions. After a few questions about what kind of salary I get and whether I'm a risk taker, She offered me a 30 year policy. The reason is that the longer the term, the higher the commission, and I'm told that it better be long term, and I can opt out before then, saving me the fact that there will be penalty fees and commissions.
Quickly in my hands was a printed color chart with an annual return of 8% on the deposited amount. I asked if it is certain that this will happen in the future, and the employee tells me that the yield is guaranteed! I pretended to believe her and walk away saying I'll "think about it".
The polite employee was either naive to believe that profitability was really guaranteed, or she lied to me to take a commission. She also "forgot" to tell me that the yield chart didn't reflect fees and commissions, which are not low at all and would halve that 8% in a good case scenario.
This was a
real story from my experience. Of course, there is no such thing as a "guaranteed" return because even with fixed income instruments like T-bills, bonds, p2p, etc., we are also likely to get less than we expect or suffer losses, and what about variable income investments like mutual funds to life insurance.
By removing the word "guaranteed" from profitability, we can somewhat get a sense of future performance from the past, i.e., historical profitability. This is true for relatively passive investments such as index funds, but not for mutual funds or investment insurance. This is the main reason why most advisors offer us pretty charts with pessimistic and optimistic returns for the future, rather than showing us what a given investment has done in the past.
If you hear anything about guaranteed returns, run away.
"There is no risk. I guarantee"
Life and the financial markets are full of unexpected events and "black swans" that can lead to loss of funds. Even deposits in banks are not guaranteed (you can check how much money is in the Deposit Guarantee Fund and compare the amount with the guaranteed deposits in some of the big banks in the country).
And then we hear from our personal financial advisor that the particular product he is selling us has no risk of loss and he guarantees that. Either he is stupid and naive or he wants to lie to us. In either situation, I wouldn't trust him.
No matter how much we trust the experts in a given field, we have to be very careful when making decisions about our money. If we hear any of these phrases, we have no choice but to seek another personal financial advisor. The market will weed out the incorrect and unprepared advisors, but it will take time and you may suffer financially from one of them. So choose carefully.